Regulator Urges New Rules for Banks to Protect Against Runs

 On January 18, according to Reuters, the acting Comptroller of the Currency, Michael Hsu, who is a top U.S. banking regulator, shared plans for new rules aimed at helping banks deal with situations where depositors rapidly withdraw their money, similar to what happened with Silicon Valley Bank (SIVBV.UL) and other mid-size banks last year.

Hsu proposed that larger banks should be required to show they can quickly access funds in the "ultra-short term." Currently, the rules assess a bank's health over a 30-day period, but Hsu emphasized the need to evaluate their ability to withstand sudden and severe runs. The new rules would measure larger and midsize banks' capacity to gather cash over just a few days.

As part of this initiative, Hsu suggested that regulators should encourage banks to be prepared to access emergency funding through the Federal Reserve's discount window, a resource often avoided by banks to prevent appearing weak to the markets. He explained, "You need to be able to get to the weekend, and that means being able to convert whatever you have into cash, and the most reliable way to do that is through the discount window."

Hsu's comments indicate ongoing efforts by regulators to adjust rules following a series of bank failures in the spring of 2023. However, he did not provide details on which banks would be affected or when the proposal would be introduced. The banking industry is already resisting various rule changes being considered by regulators.

Under Hsu's proposed rule, banks would be assessed based on their exposure to uninsured deposits, similar to what happened with SVB. The rule would give credit to firms that position collateral at the discount window in advance, enabling them to quickly access emergency funds if necessary.

As part of the assessment, banks would be evaluated on their readiness to access the discount window, potentially including mandatory test draws during calmer periods. Hsu believes that this approach would make it clear that regulators expect banks to use the discount window during stressful times to cover short-term liquidity outflows, potentially destigmatizing its usage.

Regulators have long tried to encourage banks to see the discount window as a viable tool, but a Reuters analysis from 2023 found that many banks were unprepared to use it, even some larger firms. Recently, some banks have reported lower profits, partly due to the increased cost of retaining deposits amid higher interest rates.

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